Health Check: How Prudently Does Benalec Holdings Berhad (KLSE:BENALEC) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Benalec Holdings Berhad (KLSE:BENALEC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Benalec Holdings Berhad

How Much Debt Does Benalec Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Benalec Holdings Berhad had RM98.4m of debt, an increase on RM93.8m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Benalec Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Benalec Holdings Berhad had liabilities of RM85.4m due within 12 months, and liabilities of RM215.7m due beyond 12 months. Offsetting these obligations, it had cash of RM619.0k as well as receivables valued at RM77.0m due within 12 months. So it has liabilities totalling RM223.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM91.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Benalec Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Benalec Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Benalec Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM42m, which is a fall of 74%. That makes us nervous, to say the least.

Caveat Emptor

While Benalec Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM27m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RM19m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Benalec Holdings Berhad (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.